Tuesday, 11 September 2012

Does RDR prove FSA is still not first for purpose?

The future of free financial advice, outsourced to Nigeria?
What is RDR?  It is a change in the whole structure of the Independent Financial Adviser market in in the UK. After several scandals around endowment and pensions mis-selling, the regulator decided that two things needed to be done. The first was to make advisers take harder exams to become 'RDR's' so that the lever of advice offered was better. The second element though was to change how IFA's made money, now they would have to charge fees upfront rather than taking commissions - this change is a real problem for the industry.

The best comparisons I can think of are free phones and free banking. You may pay a little for your mobile, but most o the money is recouped by the provider through monthly charges. With Banking, our accounts are free, but hidden charges on overdrafts and poor interest rates help the banks make that up.

As we know from the Internet world, once something is perceived as free, any attempt to charge for it generally fails. But thee Government and its public sector advisors see commission as a bad thing per se and are happy to ban it; even the EU has not gone down this road.

Unsurprisingly, IFA's are up in arms about the regulatory changes, they way they need to record their dealings is now more process driven, so they are spending lots on new systems, plus their future business model is a tricky one making the case of investment challenging.

Personally, I have never paid anyone for financial advice, but I know plenty who do - if though the payments have to now be made upfront instead of 'hidden', will people want to pay? Maybe, maybe not, we will see. It is a huge change to a huge industry.

Clearly, people resent middlemen in general taking cuts and there is a good case to make that Financial Institutions and Banks have taken too much of a cut int he past few years, helping to create our economic disaster zone of an economy. But the principle of taking a cut is a good one, it is how the world works and provides the link between service and payment.

The FSA here is, as usual, failing to understand that its new rules will end a whole way of doing business - or perhaps it does not. How are these regulators qualified though to decide on entire industry business models, what industries have they run - plus where does it go next? No introduction fees for Funds and Investments at all - a move to people having to seek free advice with the diminution in quality that this entails?

After all, what sort of so called non-advice institutions may step in to help people in this brave new world of financial advisory services - why the main retail banks of course, the source of all the mis-selling scandals in the first place....

8 comments:

andrew said...

Actually, I think the FSA is doing the right thing.
My parents were sold a pension by a nice man from the Equitable Life.
The documentation did say that he would get paid ~4k over a couple of years, but you had to read a lot of small print and work out some percentages.
(By a process of pure luck he got one that did not go wrong)
In 2010, my pension was moved to a GPP and the amount of commission that was going to be diverted was as unclear as you can get without being deliberatly obfuscatory.
I work in this industry (on the software side), if it is unclear to me, most other people will have little chance of understanding what a 20 minute conversation and a signature will cost them.

The industry has been very good at not being clear about charges / fees / commission for decades.
The regulator has got bored with this and the mis-selling cases caused.
You cannot hide or obfuscate a fee if it is paid directly to the salesman.

I take my car in for a service and they can tell me upfront it will cost £200.
It does not cost £0 + 1% of it's residual value for the next 5 years.

This will be v. unpopular with intermediaries of all stripes. It may well be unpopular with people who think a £500 cost now is less than £4000 spread over 10 years.
But (he said ungramattically), is that not the point of a regulator.

Richard Elliot said...

What concerns me about the whole RDR is that no institution (that I'm aware of) has come out and said how they will charge of their products going forward.

I've never paid for financial advise, but do have some funds through HL, who get a trail commission.

They pass on a small amount of the commissions to me as a loyalty bonus, which I assume is certain to disappear. As they won't be getting any money from the fund going forward I expect to have to pay an account charge. I don't mind doing this if the fund charges go down. Somehow I can see the funds not reducing their charges and me being out of pocket overall.

I would actually consider paying for some advice in the future if the charges were clearly laid out and I felt the advisor had no hidden agenda.

CityUnslicker said...

Andrew - I don;t dispute the need for change or that the industry has been in cahoots against its customers to an extent.

This change though has no future business model attached. The industry may well get killed. All well and good you may say, but thousands of unemployed and an industry on its knees perhaps wasn't what even you were asking for.

Clarity of fees, no insider deals, yes - but this is a very extreme move I think.

CityUnslicker said...

Andrew - I don;t dispute the need for change or that the industry has been in cahoots against its customers to an extent.

This change though has no future business model attached. The industry may well get killed. All well and good you may say, but thousands of unemployed and an industry on its knees perhaps wasn't what even you were asking for.

Clarity of fees, no insider deals, yes - but this is a very extreme move I think.

Steven_L said...

Those IFA's that want to still rake in commission will simply go into the so called 'unregulated' market.

They will trawl through their customer database and invite their punters down to snazzy sales presentations. Here they will sell them parking spaces under skyscrapers in Dubai, luxury villas on Argentine golf course and the like.

None of which have been, or are ever likely to be built. Commissions are very high on the 'unregulated' side of the fence.

Some of them will be persuaded to dissipate their occupational pensions and throw that in via a SIPP too. The FSA, City of London Police, the local cops and all the other regulators will most likely ignore it all too. Of maybe issue a cursory press release.

Sebastian Weetabix said...

@CU - "in cahoots to an extent"

Are you kidding? It's a conspiracy against the public. It always was. Where are the customers yachts?

formertory said...

You're exactly right about this being a bung to the banks.

What the FSA should have done was simply do away with taking all the commission in an up-front lump sum (as all the banks and most advisers do) and obliged them to take trail commission. Once upfront commission has been taken, the punter's on their own; with 0.5% trail the adviser has a vested interest in monitoring and reviewing performance with the client.

Lump sum commission is what encourages poor practice.

andrew said...

As with all movements forward, at first it is controversial and then in 20 years time we will wonder how it could be otherwise.

There are lots of v. expensive products that we buy that have a lasting effect long after we pay for them (cars) and they have an up-front pricetag.

The underlying motive behind most that oppose a clear pricetag is that they know not many are willing to pay as much as the advisors want for good advice.

Once there is an open market (who here will object to that) - and that is only possible if the price is clear - buyers and sellers can come together and agree a price.

For most people who have the internet and are not looking for exotic, unregulated products, the value of this advice is not large.

Financial Advisors may well go the way of Typists. This is progress.